Stanley's blog

“Some countries on the one hand want the renmimbi to appreciate, but on the other hand engage in brazen protectionism against China. This is unfair. Their measures are a restriction on China’s development.”

Why did Chinese Premier Wen Jiabao, speaking at the end of the China-EU summit in Nanjing on 30 November, adopt such an aggressive approach?

Dark, protectionist clouds are gathering. Despite the G20 commitment of 16 November to avoid protectionism, OECD, WTO and UNCTAD all report a rise in protectionist measures. It is widely accepted that protectionism is a ‘lose-lose’ game and that the US, EU, China and other countries would all suffer from protectionism. But, China would suffer most of all.

China is complaining about the rise in protectionism – mainly against Chinese imports to the US and the EU. Both have opened many anti-dumping investigations into Chinese imports.

The US has imposed a tariff on China-made tyres – a victory for the complainant, the United Steelworkers Union, over tyre importers and some US tyre manufacturers with plants overseas. However, it does not follow that overall imports will be less as there are other cheaper sources. Even more recently, the US has imposed duties on steel pipes imported from China. There are also “Buy American” provisions in the $787bn stimulus package. The number of “safeguard” measures brought against China in the first seven months of this year (16 according to WTO) is worrying. This is an insiduous measure not requiring proof of unfair pricing.

The EU carried out, in the first half of this year, two anti-dumping investigations and imposed three anti-dumping measures against imports from China. Anti-dumping duties of 24.2% were imposed on Chinese steel rods in July. The European Commission wishes to renew its duties on Chinese shoes.

The biggest danger for China comes from the US, in the light of the special interest lobbies and the fact that Democrat sentiments are more protectionist than those of the Republican party. The “Buy American” provision is perceived to be matched by the joint statement in May by nine Chinese ministries and government agencies, led by the National Development and Reform Commission (NDRC), that government investment projects should purchase domestic products.

Beijing has opened an investigation into whether car parts and poultry from the US are being unfairly dumped on the Chinese market. A complaint has been lodged with the WTO to have the US tariffs declared illegal. China is also considering possibility imposing countervailing duties on subsidized US goods, the auto industry having been hugely bailed out. There is a history of disagreement over auto products and chickens.

It is important to bear in mind that Chinese exports subject to US or EU anti-dumping duties or currently under investigation, affect a minute proportion of imports from China. And the bigger the trade, the more trade disputes.

Manufacturing in China is helped by an undervalued exchange rate, access to cheap credit, cheap land and to other subsidized inputs and the non-enforcement of environmental and labour standards. As neither the EU nor the US have granted China market economy status (MES), the burden of proof in anti-dumping proceedings lies with China – a serious disadvantage.

Linked to this issue is the question of the value of the renminbi. This has always been more an American concern but, with the Chinese currency re-pegged to the dollar, the euro has substantially strengthened against the renmimbi, thus increasing the trade deficit and making European companies less competitive in China compared with US companies. The European concern was expressed last week at a meeting between Jean-Claude Trichet, Joaquin Almunia and Jean-Claude Juncker and their Chinese opposite numbers, at the bilateral meeting between Wen and Barroso, and at the summit itself. And President Obama had, of course, raised the matter during his November visit to Beijing.

Beijing appears to be playing into the hands of protectionism by taking such a hard line, and as the greater risk comes from Washington, seemingly ensuring that the EU and US reinforce each other’s views. While a China-US trade war is not expected, the deteriorating climate will inevitably bring extra protectionist pressure on President Obama.

There is insufficient trade reciprocity – the legal and administrative restrictions on European companies trading and investing in China are far greater than those Chinese companies face in Europe. This feeling is confirmed by the European Union Chamber of Commerce’s “European Business in China Position Paper 2009/2010” which was published in September 2009. The Chamber believes that the situation has deteriorated over the year.

To make matters worse, China’s 4 trillion yuan incentive package, is creating greater excess capacity especially in the steel, aluminum, cement, chemical, refining and wind-power equipment industries. A report of the EU Chamber of Commerce, published on 26 November, stated that China’s excess industrial capacity is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans.

Consumption usually grows more slowly than GDP and, therefore, excess capacity can only be filled by either more investment or exports. The financial and economic crisis has prevented export expansion and China desperately needs to overcome this problem.

Notwithstanding this, Beijing is making no concessions to the West and is contributing to mounting public concern, which political leaders may be unable to ignore. Why?

Wen Jiabao and others continue to suggest that the Western demands for a currency revaluation are fuelled by a desire to curb China’s economic development. Does Wen believe the picture he paints of countries unfairly asking for renminbi appreciation and engaging in “brazen protectionism”? Is there no understanding of the effect of an undervalued renmimbi?

But the Chinese leadership must know that Western perception is that trading with China is a one-way street. On the one hand, control of the domestic market has been strengthened and market access made more difficult, and the currency is being kept artificially low; and on the other hand, Beijing is calling all anti-dumping duties protectionist.

There are differing views as to why Premier Wen has adopted this uncharacteristically aggressive tone:

• It is an example of the new assertive China.
• It is due to knowledge of what the Plaza devaluation of the yen in 1985, forced through by the US, did to the Japanese economy, without helping the US economy.
• It is for domestic consumption, clearing the way for incremental appreciation through a basket of currencies, but not in response to foreign pressure.

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